LECTURE 10: ECONOMICS OF ONLINE ADVERTISING

1. LECTURE 10: ECONOMICS OF ONLINE ADVERTISING AEM 4550:Economics of AdvertisingProf. Jura Liaukonyte

2. Lecture Plan • Google and Advertising • Online Advertising Models • HW 3

3. ONLINE ADVERTISING

4. ONLINE ADVERTISING Online Advertising • Partially Based on HBS case “Google Advertising”, which is a required reading • Online Advertising Models • Measurability • Google Advertising Revenues

5. Online Ad Formats • Floating ad: An ad which moves across the user's screen or floats above the content. • Expanding ad: An ad which changes size and which may alter the contents of the webpage. • Polite ad: A method by which a large ad will be downloaded in smaller pieces to minimize the disruption of the content being viewed. • Wallpaper ad: An ad which changes the background of the page being viewed. • Trick banner: A banner ad that looks like a dialog box with buttons. It simulates an error message or an alert. • Pop-up: A new window which opens in front of the current one, displaying an advertisement, or entire webpage. • Pop-under: Similar to a Pop-Up except that the window is loaded or sent behind the current window so that the user does not see it until they close one or more active windows. • Video ad: similar to a banner ad, except that instead of a static or animated image, actual moving video clips are displayed. • Map ad: text or graphics linked from, and appearing in or over, a location on an electronic map such as on Google Maps. • Mobile ad: an SMS text or multi-media message sent to a cell phone.

6. Search Advertising • Highly effective since it reaches people when they are interested in a topic • Relevant, yet not obtrusive • Has expanded rapidly in last few years

7. Online Advertising Measurability • Huge advantage in measuring effectiveness • Pay per click • Conversion tracking • Value of ranking system • Ranks ads by bid x ad quality • Show ads likely to get the most valuable clicks in the most prominent position • E.g., “best ads get best exposure” • Creates a virtuous circle: individuals want to click because results are relevant

8. Search Advertising • Search advertising estimated to be 6 times more effective than a banner ad • Delivers qualified leads • 80% of Internet user sessions begin at the search engines (Source: Internetstats.com) • 55% of online purchases are made on sites found through search engine listings (Source: Internetstats.com)

9. Search Engines Market Share Today (2012)

10. Internet Advertising Models • For what exactly should advertisers pay and when? • When the ad is being shown to the user • When the ad is being clicked by the user • When the ad has “influenced” the user in the sense that its presentation lead to a “conversion event” • Conversion event- the actual purchase of the product advertised in the ad • Why wouldn’t an advertiser favor number 1?

11. Student Example Airline Industry

12. Total Online Advertising Spending (in thousands of dollars)

13. Online Advertising • Search advertising • Interactive Ads • Banner and Pop-up ads • Facebook and social networking • Online giveaways • Promotional pricing- legal low fares • Airline websites, travel sites, booking sites

14. Targeting Consumers • Ad Words • Ad Sense • Flight history: delays, cancellations, lost bags • Click responses • Geographic location, surfing patterns, airline ad exposure

15. Interactive Ads Southwest “Ridiculous”

16. Banner Ads

17. Facebook

18. Websites

19. Websites

20. Websites

21. Advertising Payment Methods • CPM – Cost per Mille – an advertiser pays per one thousand impressions of the ad (“Mille” stands for “thousand” in Latin); an alternative term used in the industry for this payment model is CPI (Cost per Impression). • CPC – Cost per Click (a.k.a. Pay per Click or PPC; we will use these terms interchangeably) – an advertiser pays only when a visitor clicks on the ad, as is clearly stated in the name of this payment model. • CPA – Cost per Action – an advertiser only pays when a certain conversion action takes place, such as a product being purchased, an advertised item was placed into a shopping cart, or a certain form being filled. This is the best option for an advertiser to pay for the ads from the advertisers’ point of view since it gives the

22. PAY-PER-CLICK Advertising Model • Targeted advertisement based on two effectiveness measures: • Click-Through Rate (CTR): specifies on how many ads X, out of the total number of ads Y shown to the visitors, the visitors actually clicked; in other words, CTR = X/Y. CTR measures how often visitors click on the ad • Conversion Rate: it specifies the percentage of visitors who took the conversion action. Conversion rate gives a sense of how often visitors actually act on a given ad, which is a better measure of ad’s effectiveness than the CTR measure

23. Recent History of CPC Method • Cost Per Click is the predominant advertising payment method, made popular by search engines such a Google and Overture (now part of Yahoo!). • Google introduced CPC AdWords program in 2002. • Combining a particular ad payment method with a particular targeting method. For Google and Yahoo! the two main models are the keyword-based PPC and the content-based PPC models.

24. Cost Per Click Two problems with the Cost per click model: • Although correlated, good click-through rates are still not indicative of good conversion rates • It does not offer any “built in” fundamental protection mechanisms against the click fraud

25. Problems with PAY-PER-CLICK • CLICK FRAUD: People clicking on products/advertisements excessively without the real intent of actually making any purchases.

26. Click fraud in AdWords • Make the competitor pay more • If you’re second, click on the competitor’s advertisement enough so that he will hit his budget for the day

27. Google’s Pay-per-Click Advertising Model • AdWords • A program allowing advertisers to purchase CPC-based advertising that targets the ads based on the keywords specified in the users’ search queries. • Ad Rank = CPC x QualityScore • QualityScore- a measure identifying the “quality” of the keyword and the ad combined • The more the advertiser is willing to pay (CPC) and the higher the click through rate on the ad (CTR), the higher the position of the ad in the listing is.

28. Paid Natural Paid

30. Creating an AdWords Ad

31. Google AdSense • Google AdSense is a program for website owners to display Google’s ads on their websites and earn money from Google as a result.

32. Uses of AdSense • AdSense for Search (AFS): publishers allow Google to place its ads on their websites when the user does keyword-based searches on their sites. • AdSense for Content (AFC): the system that automatically delivers targeted ads to the publisher’s web pages that the user is visiting. These ads are based on the content of the visited pages, geographical location and some other factors.

33. AdSense forContent • Contextually-targeted ads • Example: cheese.com • What ads would you show? • Buy some cheese • Look for other kindsof cheese • Recipes? Or diet?

34. Opportunity Cost • Calculate the missed opportunity cost (forgone revenue) # of people searching for a specific keyword engine share (Google ~= 80%) expected click-through rate average conversion rate average transaction amount x x x x • E.g.10,000/day x 80% x 10% x 5% x $100 = $4,000/day

35. Challenge to advertisers • Keyword choice • This is the most critical • Market efficiencies: high CTR words have high prices • What matters is the cost effectiveness: the ROI or ROA • E.g., plurals get more clicks and more conversions than singulars: “Diamonds” more valuable than “diamond” • How much to bid • Measure cost-per-acquisition and/or ROA

36. Bidding Strategy • Determine value per click • Probability of purchase x profit margin • Determine relationship between cost and clicks • How much do you have to pay to get x clicks? • Equivalently use incremental cost per click

37. AEM 4550: Economics of AdvertisingProf.: Jura LiaukonyteLecture 10 Brand Equity

38. Lecture Plan • HW 3 • HW 4 • Brand Equity • Measuring Brand Equity • Example • How to calculate Brand Value

39. Brand Equity • Brand Equity is a set of brand assets and liabilities linked to a brand, its name and symbol, that add to the value provided by a product or service to a firm and/or to that firm’s customers. • Assets and liabilities underlying brand equity must be linked to the name and/or symbol of the brand.

40. Brand Equity

41. Brand Equity: Why it matters • Outcomes of brand equity • Greater loyalty • Less vulnerability to competitive marketing actions • Less vulnerability to marketing crises • More inelastic consumer response to price increases • Possible licensing opportunities • Additional brand extension opportunities • Larger margins: on average, prices of strongest brands are 19% higher than weakest brands in category

42. Benefits of Brands to Consumers • Simplifies choice process • Enhances confidence in choice • Reduces perceived risk – recognition of consistency of quality • Provides emotional benefits – signal of status, taste, or affiliation

43. Brand Equity Research Objectives • Identify the effectiveness of individual brand assets • Identify the barriers to achieving a brand’s full potential • Identify consumer relationships with the brand • Identify the status of the brand in a competitive context

44. Business Week Top 10 Brand Equity

45. BrandZ Top 100 Brands 2011

46. Interbrand 2011

47. One approach to Brand valuation calculation • A systematic approach to brand valuation was jointly developed by Interbrand and the London Business School in 1988. The method was partially revised in 1993. • Since then, Interbrand has evaluated some 3500 brands for nearly 400 companies.

48. One approach to Brand valuation calculation • The purpose of evaluations of brand equity: • Evaluations for financial transactions in connection with mergers & acquisitions, internal licensing and fiscal issues. • Evaluations to optimize brand investments, advertising expenditures, monitor an manage future changes in brand value.

49. Brand Equity/Value • Brand value is defined as the NPV of future earnings generated by the brand alone. One approach (Interbrand) is based on the following three economic functions: • the brand’s function to create cost synergies, • the brand’s function to generate demand for the products and services, and • the brand‘s function to secure future demand and thus reduce operative and financial risks.

50. Calculating Brand Equity • The method employed to evaluate brands comprises five steps: • Segmentation, • Financial analysis, • Demand analysis, • Brand strength analysis, • Calculation of the net present value of brand earnings.